Let’s make a deal, Stephen Harper tells Brazil

Prime Minister Stephen Harper’s trade tour through Brazil the past two days represents a warming of relations between the two nations, however there remain barriers to a true free trade agreement that would open up a trade relationship worth almost $6-billion in 2010.

With the United States crumbling with each passing day, the need for new, high-growth trade partners is becoming an urgent need if Canada is to maintain its own economy.

“Brazil is a country with 200 million people in our own backyard that we’ve ignored, which has been a mistake,” said Pierre Fornier, political risk analyst with National Bank Financial, from Montreal. “The only surprise is it has taken this long to put all these talks into motion.”

Mr. Harper’s olive branch to Brazil, which includes more liberal tourism regulations and a new chief executive forum co-chaired by Rick Waugh, chief executive with the Bank of Nova Scotia, comes almost a decade after a destructive spat between rival aerospace giants Bombardier Inc. and Brazil’s Embraer S.A.

Beginning in the late 1990s, both companies accused the other of receiving government subsidies to create an unfair advantage. The trade war resulted in several rulings from the World Trade Organization between 1999 and 2002 that found both countries ran illegal subsidy programs for their aerospace industries.

Angelo Katsouras, a geopolitical analyst with National Bank, said relations between Canada and Brazil have slowly warmed up since then thanks to the passage of time and changing administrations.

“Things have calmed down a bit since then. It looks like Harper is trying to make stronger ties in the region so that even if there is some tension, another dispute like Bombardier, the bonds would be stronger than that,” he said.

However, there are other reasons that have kept the two countries apart.

For one thing, Brazil is home to a vast agricultural sector with economies of scale that would dwarf the competition in Canada, Mr. Katsouras said. Any free-trade proposal would come up against strong opposition from Canadian farmers and food producers.

In 2010, Brazil shipped some $800-million in meat and vegetables, alcohol, tobacco, coffee and spices to Canada. And overall, Canada faces a trade deficit with Brazil, as $2.5-billion in exports to the country fall short of $3.3-billion in imports coming from Brazil.

Brazil also competes with Canada in the field of natural resources, with both countries’ rich mining and offshore oil deposits also a target of commodity-hungry China, although there are opportunities for established Canadian oil and gas companies to sell their expertise and equipment to Brazilian operations, Mr. Katsouras said.

“Tariffs are also an issue for most products coming into Brazil. Certainly the Brazilian government has been more protectionist than others,” said Paul Beamish, an international business and emerging markets professor with the Richard Ivey School of Business.

Beata Caranci, deputy chief economist with TD Economics, said the trade relationship between Canada and Brazil will ultiamtely never come close to replacing the United States, but it is still well worth getting in on the ground floor.

“The whole economy is worth about $2-trillion, so there’s only so much you can leverage out of it at the moment. But you have to start now to forge those relationships, before it becomes a $4-trillion economy,” she said.

And with the FIFA World Cup and Summer Olympics coming to Brazil in 2014 and 2016 respectively, there are a wealth of infrastructure dollars to be had.

Todd Winterhalt, vice-president of international business development with Export Development Canada, said Canadian businesses have already started to express more interest in entering the Brazilian market, even without a free trade agreement. If Mr. Harper can come up with a deal within the next few years, things would line up nicely.

“It did take a number of years to move past the [Bombardier-Embraer] history, but if we’re talking about more than $1-trillion in infrastructure over the next five years in Brazil, that will dwarf any lingering issues from say the aircraft dispute,” he said.